China’s Approach to Compulsory Licensing of Intellectual Property Under its Anti-Monopoly Law Xinzhu Zhang Research Centre for Regulation and Competition.

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Presentation on theme: "China’s Approach to Compulsory Licensing of Intellectual Property Under its Anti-Monopoly Law Xinzhu Zhang Research Centre for Regulation and Competition."— Presentation transcript:

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China’s Approach to Compulsory Licensing of Intellectual Property Under its Anti-Monopoly Law Xinzhu Zhang Research Centre for Regulation and Competition Chinese Academy of Social Sciences Singapore, September 2009

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Introduction Disputes regarding IP infringement is one of the driving forces for the Chinese government to strengthen competition policy in IP. As China’s economy continues to open and expand, disputes regarding IP infringement have increased. Since China’s entry into the World Trade Organization, the infringement damages paid by Chinese firms to international companies that manufacture DVDs, TV sets, digital cameras, MP3, cars, telecommunications equipment have increased significantly. The huge losses have alerted the Chinese authorities to the importance of IP protection, the urgency of prohibiting the abuse of IP, and the relationship between IP protection and the maintenance and promotion of competition.

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China is facing a tough challenge of designing a sound compulsory licensing regime to prohibit restraints on competition and to encourage investment in innovation. It will require not simply balancing IP protection and the promotion of competition, but will entail some political economy of IP regulation. Authorities may be inclined to tilt the balance in favor of compulsory licensing, simply on grounds of perceived national advantage. However, the Chinese government is also committed to a national strategy of creating an innovation- oriented country to sustain high economic growth and enhance international competitiveness.

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Legal Framework for Compulsory Licensing in China The fundamental legal principle for compulsory licensing in China is that refusal to license IP is a right of the owner guaranteed and protected by civil law and IP law. According to Article 71 of China’s Civil Law, the owner of IP has the authority to lawfully possess, utilize, benefit from, and dispose of his IP in accordance with laws. IP right is not absolute and receives protection only if the owner does not abuse it. If the owner of IP abuses the right to refuse to license, with the purpose or effect of eliminating or restricting competition, antitrust liability may arise and compulsory licensing may be ordered.

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China’s laws governing the intersection of IP and competition emerged only recently. China enacted its first Patent Law in 1984, which was revised in 1992, 2000 and 2008, respectively. Compulsory licensing was imposed in the 1984 Patent law but it did not deal with explicitly whether compulsory licensing should be imposed to prohibit or remedy anti-competitive conduct. The first appearance in China’s Patent Law of language permitting compulsory licensing to be used to address competition problems was in the Measure for Implementation issued in 2001 for the revised IP law in 2000.

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The latest revision of the Patent Law was published in 2008, after the enactment of the Anti-Monopoly Law. There are now six circumstances in which compulsory licensing may be explored. In particular, Article 48 of the 2008 Patent Law stipulates explicitly that compulsory licensing of IP shall be imposed to remedy certain kinds of anti-competitive conduct. Before the AML was enacted, statutory rules against anti- competitive conduct were scattered among several sets of laws and regulations including the Anti-Unfair Competition Law and the Price Law. But none of them addresses directly the competition problems that might arise with respect to IP, let alone those pertaining to compulsory licensing.

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China enacted the AML in 2007. The AML explicitly promulgates the legal principles guiding antitrust enforcement related to IP. Article 55 of the AML stipulates that while the law shall not interfere with the conduct of business operators to exercise their IP rights under relevant laws and administrative regulations, it prohibits business operators from eliminating or restricting market competition by abusing their IP rights. Thus the anti-competitive misuse of IP rights may result in liability if the antitrust enforcement agencies can establish that the owner of the IP has violated the law.

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Until recently, however, neither the AML nor the other competition laws had directly addressed refusals to license IP rights. Article 17 of the AML prescribes some general circumstances under which antitrust liability may flow from the refusal to license IP that possesses market power. Article 17 (1) of the AML may impose liability if the licensing fee for the relevant IP is “too high” and unfair. Since charging high prices for licensing is closely related to refusals to license, this Article sounds troublesome because it may be interpreted to require compulsory licensing when the owner of “dominant” IP rights seeks to charge the monopoly price to would-be licensees.

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Under Article 17 (3), unilateral refusals to license IP without justifiable reasons may result in liability, which means that under the injunction requirement of Article 15, compulsory licensing may be used to remedy an “anti-competitive” refusal to license. Under Article 17 (5), which sets forth the rule against tie-ins, certain kinds of conditional licensing may be subject to antitrust liability. And Article 17 (6) proscribes unjustified discrimination. It is important to emphasize that the AML has adopted the general principle that rule of reason analysis governs the establishment of liability under these rules, which suggests that refusals to license may be justified by “valid” reasons.

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Jurisdictions for antitrust enforcement in IP are complex. The State Intellectual Property Office (SIPO), an administrative agency under the State Council, is charged with enforcing IP law. In particular, SIPO is responsible for investigating and deciding issues arising out of claims for compulsory licensing, including the appropriate licensing fees and the length of the license. The power to enforce the AML is shared by the Ministry of Commerce (MOFCOM), the National Development and Reform Commission (NDRC), and the State Administration for Industry & Commerce (SAIC), which are in charge of dealing with merger control, price agreements and price abuse of dominant position, and non-price abuse of dominance, respectively. Thus both the NDRC and the SAIC may have authority to deal with questions of compulsory licensing.

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Private actions may be brought for anti-competitive conduct involving IP. Article 50 of the AML establishes civil liability for antitrust violations. The Provision on the Subject Matter of the Civil Case issued by the Supreme People’s Court in 2008 stipulates explicitly that anti-competition cases in IP shall be tried by the Third Civil Division of the Supreme People’s Court. However, civil lawsuits against anti-competitive conduct are likely to develop very slowly in China. As of this writing, the enforcement mechanism for antitrust lawsuits has not been laid out. It is known that the Third Civil Division of the Supreme People’s Court shall deal with antitrust cases but many questions remain: where the first trial shall be placed, what the legal procedures for private actions are and so on.

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Inadequacies in China’s Legal Framework for Compulsory Licensing The Patent Law and the AML make certain refusals to license IP remediable by compulsory licensing. But the current IP laws and competition laws still cast some shadow over the enforcement of antitrust rules in the field of IP, in particular regarding the imposition of compulsory licensing, and of the terms on which compulsory licensing might be ordered. First, there is lack of comprehensive statutory criteria for assessing the extent to which the use of IP rights might restrain competition. Article 55 of the AML stipulates that any anti-competitive conduct in the use of IP shall be regulated by the AML. Article 17 of the AML specifies six categories of restraints on competition but these are not placed into the context of IP use.

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Second, until recently there have been no explicit legal rules governing compulsory licensing in the software industry. Many IP rights in the software industry are protected by copyright, and compulsory licensing has been one of the controversial issues in the Microsoft cases. However, the main bodies of law regulating the software industry in China provides legal rules to deal with competition issues in general and compulsory licensing in particular. It is unclear whether China’s competition agencies may require the owner of the interface code of a software system to provide access to its rivals and, if so, under what circumstances and terms. The open access issue can be analyzed under the general guidance of the AML. Indeed, one can analogize a denial of access to a refusal to deal under the essential facility doctrine. But it is doubtful that the existing IP laws and competition laws are adequate to deal with such cases.

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Third, there are many uncertainties regarding the application of Article 17 of the AML to IP. For instance, Article 17 (1) provides that antitrust liability may be imposed if a seller sets a high price that is unfair. In the context of IP this implies that the licensor cannot set the license fee or royalty at the monopoly price level, even if it has done nothing to restrain competition. This provision is particularly worrisome. Licensees are naturally inclined to complain that license fees are too high; and if their complaints find a receptive audience within the relevant enforcement agency, owners of IP rights will run the risk of being denied adequate compensation for their investments in R&D, which would likely discourage investment in and development of innovations.

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Fourth, neither IP law nor competition law specifies a methodology for establishing license fees. Article 57 of the Patent Law stipulates that if compulsory licensing is ordered, the licensee should pay “reasonable” usage fees to the licensor. However, no guideline has been released either for administrative ruling or court review. Finally, there exist potentially serious problems of overlapping and conflicting jurisdiction. SIPO and the competition policy agencies share the enforcement power in imposing compulsory licensing to remedy IP restraints on competition. In addition, there may be overlapping and conflicting jurisdiction among competition agencies - the NDRC and SAIC have the power to prohibit monopolistic agreements and abusive conducts in price and non-price fields.

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Relevant Factors in Determining China’s Compulsory Licensing Policy Fundamental economic principles suggest that imposing compulsory licensing in China should take due account of special “developing country” issues - putting the basic economic tradeoffs between short run and long term efficiencies into context. High proportions of patents granted to non-residents do not necessarily mean less protection of IP of more compulsory licensing. As in other developing countries, most patented technologies and copyrighted IP practiced in China are developed abroad, in part because of China’s current comparative disadvantage in R&D investment.

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Even though the overall proportion of patents granted to non- residents was only 14.26 percent in 2007, the total inventions patented to foreign firms and individuals were 52.99 percent while the percentage of utility model and design patents granted to non-residents was 1.1 and 9.34. This suggests that most patents granted to local residents are utility model and design patents with relatively low technical content, while most patents owned by foreign companies or individuals have relatively high technical content, and therefore have more commercial value.

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From an economic perspective the distribution of patents granted to residents and non-residents will have a profound impact on the basic tradeoffs involved in establishing a policy for compulsory licensing. Providing incentives for firms to invest in R&D by permitting monopoly rents in return for disclosure to the public of the underlying technology may not be the primary function of the patent system in China under current circumstances. Since high- value technologies patented in China have mostly been invented abroad, reducing monopoly rents from sales in China might not cost China much in innovation.

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We believe this so-called developing country argument to be short-sighted and incomplete. First, the profile of the patent grant is changing in China as China becomes more economically developed. Given the trend of China’s economic growth and the national strategy to develop an innovation-oriented country, the proportion of patents granted to non-residents is likely to decline further in the future. This poses a strong challenge to the standard developing country argument.

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Second, a parochial approach to IP rights might diminish the long-run attractiveness of China for FDI. Since weaker protection of IP and the threat of compulsory licensing tend to lower the expected returns of foreign investments, they could well affect FDI in the long run. Third, adverse selection effects might cause firms with dominant core technologies either to leave China or to refrain from entering. If a foreign firm with dominant technology expects that its IP may be declared an essential facility and made subject to compulsory licensing, it might well choose to avoid China’s market.

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Finally, independent innovation might be suppressed. The developing country argument builds upon the assumption that patents owned by non-residents are disproportionately numerous but the importance of independent innovation is played down. It is conflicting with the national strategy of building an innovation-oriented country. Compulsory licensing policy should take due consideration of enforcement capability. The legal rules regulating compulsory licensing are inadequate; the jurisprudence and capability of economic analysis are still being developed; and there are problems in the allocation of enforcement responsibilities.

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Conclusions and Recommendations In China’s context, since compulsory licensing of IP is so complicated and subtle an issue, it may be too soon to recommend any specific approach. However, certain preliminary steps should be taken. First, the Chinese authorities regulating issues involving IP and competition law should issue specific regulations and guidelines to clarify the meaning and likely application of the legal rules guiding law enforcement. Second, the administration of law enforcement should be improved to facilitate the co-ordination of enforcement agencies, avoid conflicts between them, and ensure their independent decision making on compulsory licensing. Finally, efforts on capacity-building in law enforcement should be stressed.

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